‘A force to be reckoned with’: What the next decade has in store for Asian economies
If you take a step back and assess the outlook for Asian economies until 2030, the picture is undoubtedly positive. Although some nations are still mired in the pandemic, many of the continent’s biggest economies have recovered well and are back to promising growth levels. Pictet is generally upbeat, expecting the continent over the next 10 years to increase its share of world GDP from the 34.8% it accounted for in 2019. Overall, the horizon looks rosy.
There are, however, numerous nuances and subtle yet important distinctions between the continent’s various economies that might boost or impede growth over the coming years. Evelyn Yeo, who is Head of Investments in Asia at Pictet Wealth Management Asia, spends much of her time trying to understand these nuances and distinctions, so we caught up with her to build a more detailed picture, taking in everything from demographics to economic policy and from R&D to climate change.
Demographics is one area, where these nuances and discrepancies are particularly stark. ‘There’s good reason to be concerned about demographics across Asia at this point,’ says Evelyn, sitting in Pictet’s office in Hong Kong. Behind her worries is, of course, the spectre of Japan. The country has long had not only an ageing population but a shrinking one as well, so ‘there’s less contribution to GDP and, on the other hand, more weight on the public finances,’ Evelyn says. The fertility rate required to keep a country’s population stable is around 2.1 births per woman, yet Evelyn notes that China’s rate is around 1.7, Taiwan’s is below 1.1 and South Korea’s is below 1. In demographic terms, these countries are heading the same way as Japan.
At the other end of the spectrum are India and Vietnam, which have more favourable demographics, with high fertility rates and working-age populations that will continue growing. India, for instance, is set to overtake China as the world’s most populous nation within the next five years and is expected to add 169 million people to its working-age population by 2030, compared to 2015. Similarly, Vietnam has a fertility rate above 2. ‘Given that,’ says Evelyn, ‘Vietnam isn’t likely to face the threat of an ageing population for the next 20 years.’
Evelyn and her colleagues at Pictet are keeping a close eye on Vietnam – and not simply for its demographics. The Southeast Asian country’s policymakers have studied the successful tactics and reforms put in place by China and the original Asian Tigers: South Korea, Hong Kong, Taiwan and Singapore. Emulating them, Vietnam hopes to become the world’s latest manufacturing heavyweight.
It has been aided in this endeavour by some good fortune. Firstly, for years, there has been what Evelyn calls a ‘continuous supply-chain migration out of China’, as land and labour costs have risen there. This has benefitted Vietnam’s manufacturers. But this trend has been accelerated in recent years by the US-China trade war and by Covid-19, which have both shown multinationals that they need to diversify their supply chains out of China. ‘All of this is benefitting Vietnam,’ says Evelyn, who notes that the country’s exports grew by 16% per annum between 2005 and 2019. ‘Vietnam is a force to be reckoned with.’
Another country that has shown a desire to boost manufacturing and exports is India, although its reforms have not always been effective. The country has long wanted to emulate China and become the ‘factory of the world,’ says Evelyn, but ‘misguided policies have held back India’s manufacturing sector.’ Many hoped that the current administration under Prime Minister Narendra Modi would bring about a change in fortunes, but that hasn’t been the case. In 2014, for instance, the government launched a ‘Make in India’ initiative to support manufacturing, yet this sector’s share of total GDP actually went down over the subsequent five years. ‘Political will is one thing,’ says Evelyn, ‘but implementation is another story altogether.’
In fact, Prime Minister Modi’s record is mixed at best. Alongside ‘Make in India’, his administration has also presided over a botched demonetisation policy, which by some estimates cost 1.5 million jobs; a GST reform that created a large drag on the economy; and most recently a poor record of handling the pandemic. The administration has also made progress, however. Evelyn points to the World Bank’s Ease of Doing Business ranking, which saw India rise 79 places in the five years to 2019 to 63rd, and the simplification of the country’s previously Byzantine labour laws.
Evelyn believes that India could be on the cusp of a momentous decade, in which it realises its true potential. She is predicting the nation will achieve an average annual GDP growth rate of 6.5% in the period 2023–2031. If it can couple its youthful demographics with smart leadership and pro-growth policies, then this feels achievable. The Modi administration’s patchy record is the biggest obstacle, though. For Evelyn, past missteps ‘show that the quality, timeliness and implementation of policies all need to be improved to ensure that India can unlock its potential.’
As supply-chain migration out of China continues, the world’s second-largest economy is pivoting even more firmly towards innovation and new technologies. R&D expenditure as a share of GDP has been rising consistently in recent years, but it still lags behind the global leaders in innovation: Japan, Germany and the US. Earlier this year, Chinese Premier Li Keqiang announced that R&D spending would increase by more than 7% per year until 2025, while companies investing in R&D will receive tax incentives. According to Pictet’s analysis, innovation ‘is set to be the main source of growth for China in the years to come’.
Alongside China as the more technologically advanced economies in Asia are Taiwan and South Korea. Here, too, R&D spending is high and here, too, Evelyn is sanguine about the outlook. ‘We expect these economies to maintain their leadership positions in global technology supply chains,’ she says, noting that they are both highly export-orientated economies. ‘This will be helped by global trends like 5G and the Internet of Things.’ Add to this the fact that both countries have ‘supportive policy environments that support innovation’ and you have a recipe for continued strong growth.
Like Professor Pushan Dutt at INSEAD, Evelyn also has more than half an eye on two potential catastrophes rumbling in the back-ground: namely, geopolitics and the climate crisis. Like most experts, she sees Taiwan as the most likely flashpoint of US-China tensions, but believes that in the short term at least, both nations have enough domestic challenges to keep them busy – not least the ongoing post-pandemic recovery. ‘Longer term, though,’ she says pointedly, ‘we won’t rule out any escalating tension.’
Similarly, climate change, when seen through a more narrowly economic lens, involves both opportunities and risks for the continent, and particularly for China. The world’s biggest emitter of greenhouse gases has committed to bold carbon-neutrality goals. This will inevitably require a lot of investment in green technologies and energy, which will create jobs; but Evelyn also believes there will be challenges. ‘This whole transition towards carbon neutrality will likely be an inflationary force, not just for China, but globally,’ she says, explaining that carbon taxes and higher energy prices will inevitably make production across Asia more expensive.
Despite these longer-term challenges, Evelyn is optimistic about Asia’s growth prospects. She and her colleagues at Pictet are expecting an average annual GDP growth rate of 4.4% across the continent (excluding Japan) between 2023 and 2031. Yet as we have seen, the subtle differences between the continent’s myriad economies, alongside those simmering longer-run risks, make the picture more complicated. It all combines to mean that governments – and, of course, businesses and entrepreneurs operating across Asia – will need to navigate the rest of this decade with a mix of sensitivity and cautious optimism.